Gold rush into Russian retail banking sector comes to an end

Foreign banks are pulling out of Russia despite investing heavily in the early 2000s.

The
gold rush into Russia’s retail banking business has come to an end after two of
the world’s biggest names says they will sell off their Russian high street
banks.

Britain’s
HSBC and Barclays Bank are the most high profile of a string of foreign banks
that are giving up on Russia. Both plan to sell their retail banking operations
despite having invested heavily into the business.

With
a population of more than 142 million people, but a very low banking
penetration – only one in four Russians have any sort of bank account at all
according to some polls – the retail banking business was doubling in size
every two years prior to the crisis, leading to a stampede by international
bankers into the market from about 2004 that sent prices for bank acquisitions
through the roof.

Barclays
Bank paid top dollar for Expobank, based in Russia’s Far East, in March 2008
for £373 million ($606 million) at the very top of the banking boom, valuing
the bank at a whopping six times book value. Over the next few years, Barclays
rapidly rolled out a retail offering across the country. But in the middle of
February, the bank announced it was seeking a buyer for its retail business and
would focus solely on investment banking.

“The
people in London realize that they paid stupid money for these banks. There was
a rush into Eastern Europe but now they are willing to write off a big loss. It
seems to me to be a very emotional decision,” said Sergei Nazarov, head of
Renaissance Asset Managers financial institutions fund.

A
week later HSBC was also reportedly pulling the pug on it retail operations
just two years after announcing ambitious growth plans, although the bank has
not confirmed reports.

HSBC
doubled its capitalization in the midst of the crisis and former CEO Stuart
Lawson said the bank was, “targeting high net worth individuals as the
cornerstone of its growth strategy.”

The
bank rolled out what it called a "world-class retail offering" in
June 2009, opening four branches in Moscow and one in St. Petersburg as the
starting point in an ambitious $200m expansion plan. However, a year later,
Lawson left the company in what one banking source at HSBC described as
“acrimonious disagreement over strategy.”

The
exit of the two British banks comes after a string of smaller bank gave up on
the Russian market. Holland’s Rabobank gave up its Russian retail license last
year. Spain's Santander sold its Russian business to local player Orient
Express in December. And both Belgium’s KBC Groep NV and Swedbank AB, the
biggest Baltic lender, have also cut back their Russian operations in the last
year, citing stiff competition as the cause.

The
reasons for the whittling down of the number of foreign players are multiple.
The crisis has obviously depressed earnings and saw the number of
non-performing loans soar. At the same time, almost all of Russia’s banks
slashed interest rates as the crisis receded in an effort to rebuild their
deposit basis, reducing the profit margins for everyone in the sector. And
finally the relentless expansion of the two state-owned giants of the sector –
Sberbank and VTB Bank – means competition has become increasingly tough.

Founded
in the Soviet era, Sberbank is a monster with about 20,000 branches nationwide
and accounts for 27 percent of Russian banking assets and 26 percent of banking
capital. VTB’s retail business, VTB-24, has more than 530 offices. Most of the
bigger private retail banks have at best a few hundred branches, mostly
concentrated in Russia’s biggest cities.

“Shrinking
margins and growing competition means the days of easy money are over,” said
Roland Nash, chief investment officer of Verno Capital. “Those banks that have
not built up sufficient bulk in the last few years are going to be pushed of
the Russian market or bought up by the stronger players.”

However,
a few foreign banks have succeed in gaining a toehold in Russia; foreign banks
cumulatively account for just over a quarter of the sectors’ total assets as of
January this year.

France’s
Societe Generale is probably the most successful after it bought a string of
banks as well as launching a greenfield retail operation of its own over the last
decade. The bank has almost 3 million clients and its consumer unit posted a
€13 million ($18 million) profit in the fourth quarter of 2010, following a
loss of €58 million ($80 million) a year earlier, according to the bank’s
website. The bank says Russia will be the biggest contributor to it
international retail earnings by 2015.